Financial due diligence mandate as part of an intra-family business transfer

Mandate overview: financial due diligence of a Romandy sewer-cleaning and sanitation company ahead of an intra-family buyout

The mandate covered the financial due diligence, carried out alongside an accounting audit, of a French-speaking Swiss (Romandy) SME specialised in sewer cleaning and sanitation (drain maintenance and unblocking, recurring service contracts). The transaction involved the buyout of a retiring partner’s stake by another family member, as part of a business transfer.

The work spanned three financial years and covered the balance sheet, income statement, working capital and cash flows, in a capital-intensive sector where the remuneration of the outgoing managers weighed heavily on reported performance.

Key challenges: separating reported performance from recurring economic performance

The main challenges of the mandate were to:

• move from a reported EBITDA margin of around 4% to a normalised EBITDA reflecting the sustainable profitability of the business;
• restate the remuneration and social charges of the outgoing managers, who have no future operational role;
• secure the net cash / (debt) position and the treatment of the shareholder current account to be repaid at closing;
• document every restatement under Swiss accounting law (art. 958a et seq. CO), in a way that holds up before an acquirer and its financial partners.

Approach and results: three families of restatements and a normalised EBITDA

The work applied a three-category restatement grid, in line with the financial due diligence methodology:

• accounting corrections and reclassifications, to ensure a true and fair presentation of the accounts (art. 958b and 958c CO);
• non-recurring operating adjustments (exceptional services, costs unrelated to operations, one-off inventory items);
• transaction restatements, neutralising the remuneration and social charges of the people leaving the Company, for around CHF 0.3 million per year.

This work brought out a normalised EBITDA of around CHF 0.5 million (roughly 17% of revenue), against a reported EBITDA close to 4%. The normative working capital was rebuilt excluding one-off items, and the restated net cash position proved structurally positive, with no net financial debt. Operating leases were reclassified as assimilated economic debt.

Key figures of the mandate (orders of magnitude)

Financial profile of the target, in rounded orders of magnitude:

• revenue: around CHF 3 million, of which roughly CHF 1.7 million recurring (service contracts);
• reported EBITDA: around 4% of revenue; normalised EBITDA: around CHF 0.5 million (~17%);
• restatements of outgoing managers’ remuneration: around CHF 0.3 million per year;
• net cash: positive, around CHF 1.5 million; operating fixed assets close to CHF 1.2 million;
• seller’s shareholder current account to be repaid at closing: between CHF 0.4 and 0.5 million;
• headcount: around fifteen employees.

Frequently asked questions: due diligence, normalised EBITDA and family transfer

What is financial due diligence used for in a family transfer?

It objectivises the real earnings capacity of the business beyond the reported accounts, which are often influenced by managers’ remuneration. It secures the buyout price between family members and provides a reliable basis for banks and financial partners. Learn more: family business transfer in Switzerland.

Why can reported EBITDA be much lower than normalised EBITDA?

In a family SME, managers’ remuneration, social charges and certain non-operating costs absorb a large share of earnings. Their normalisation reveals the sustainable economic profitability. In this mandate, the gap ranged from around 4% to nearly 17% margin.

How is the seller’s shareholder current account handled?

The seller’s current account (here between CHF 0.4 and 0.5 million) must be identified, frozen during the pre-transaction period and repaid at closing. Its nature (contributions, private withdrawals) must be documented to avoid any materiality dispute when the seller leaves.

Does a positive net cash position change the value?

Yes. A positive net cash position (here around CHF 1.5 million) increases the equity value above the enterprise value, through the bridge from enterprise value to equity value. It also improves the acquirer’s financing capacity.

What limitations apply to a due diligence of this size?

The scope depends on the available documents (aged client and supplier balances, bank balance). When some items are not accessible, materiality is assessed and the limitations are explicitly stated in the report, together with management recommendations.

How long does a due diligence on an SME take?

The usual duration is 4 to 6 weeks, depending on the quality of the accounting documentation and the complexity of the restatements. This mandate was completed in 5 weeks.

Similar mandates: valuation and structuring in business transfers

• Business valuation for the buyout of a partner’s stake in a family transfer (Romandy)
• Financial structuring of a family transfer via a holding (Romandy)
• Business valuation in a family buy-back (Switzerland)

Summary

In summary, this financial due diligence and accounting audit, carried out in five weeks for a French-speaking Swiss SME specialised in sewer cleaning and sanitation, turned a modest reported performance (EBITDA margin of around 4%) into a faithful economic picture: a normalised EBITDA of around CHF 0.5 million on revenue close to CHF 3 million, a positive net cash position of around CHF 1.5 million and a shareholder current account of CHF 0.4 to 0.5 million identified ahead of closing. By documenting every restatement under Swiss accounting law (art. 958a et seq. CO) and stating the limitations of its work, Hectelion gave the buyer and its banking partners a reliable financial basis, directly reusable for the valuation and structuring of the intra-family buyout.